Subscriptions are a continuous supply: the customer receives software, content, a membership or regular deliveries over time and pays periodically. For VAT, the timing follows the payments and invoices rather than the period of service.
Tax points for subscriptions
| Billing model | Tax point |
|---|---|
| Monthly plan, charged monthly | each payment or VAT invoice, whichever comes first |
| Annual plan, paid upfront | the payment date: the whole year’s VAT is due in that VAT period |
| Invoice issued before payment | invoice date, for the amount invoiced |
The accounts spread an annual payment over twelve months as deferred income. VAT does not: the VAT on an annual plan is declared in full when it is paid. This mismatch is normal, but the VAT control account and the deferred income schedule must be reconciled separately.
Upgrades, downgrades and cancellations
- Upgrade mid-period: the extra charge creates a new tax point for that amount.
- Downgrade with credit: a credit note reduces output VAT at the rate originally charged.
- Cancellation with refund: issue a credit note and adjust output VAT in the period of the refund. A cancellation with no refund requires no VAT adjustment.
- Free trials: no consideration, no VAT. When the trial converts, the first charge is taxed normally.
Subscription boxes with mixed content
A monthly box containing zero-rated food and standard-rated accessories is usually a multiple supply. Apportion each month’s price based on that month’s contents; a fixed split agreed once and never revisited drifts as the products change. See VAT on mixed-rate bundles.
Digital subscriptions sold abroad
Where the subscription is a digital service (software, streaming, online courses delivered automatically) sold to consumers in the EU, VAT is due in the customer’s country. UK businesses can register for the EU’s non-Union One Stop Shop in one member state to declare it. Sales to overseas business customers are generally outside the scope of UK VAT, with the customer accounting for VAT locally. Keep evidence of customer location and status, such as billing address, IP country and VAT number.
Example: annual plans in one quarter
A software company sells 50 annual UK plans at £240 including VAT in its January to March quarter.
| Amount | |
|---|---|
| Cash received | £12,000 |
| Output VAT for the quarter | £2,000 |
| Revenue recognised in the quarter (accounts) | depends on start dates; the rest goes to deferred income |
Controls
- Map each plan in the billing system to the correct VAT code before launch.
- Reconcile billing platform reports to the ledger monthly, including refunds and chargebacks.
- Check payment provider fees separately; they are not part of the subscription price.
For revenue timing in the accounts, see deferred income and revenue recognition, and for continuous supply rules generally, VAT on advance payments and tax points.